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Friday, March 11, 2011

This week I'm reading: "Endgame: The End Of The Debt Supercycle And How It Changes Everything" by John Mauldin.

The book is the best of the year so far in 2011, and I highly recommend it for investors who want a crystal clear understanding of where we stand in the current macro-economic cycle and where we go from here.

Thursday, March 10, 2011

The following shows the updated end of year S&P 500 stock market projections from the largest bank's strategy desks.

As you can see, they have not only kept their extremely bullish projections, but they have upgraded their estimates almost across the board.

Everyone is now "all in" stocks and they see absolutely no sign of trouble ahead.

The same can be seen by looking at the "short" interest on the New York Stock Exchange (NYSE). It has fallen to extremely low levels after the most recent Fed induced rally following the Jackson Hole speech in August where they announced QE2 was coming.

The lack of short interest is very important because in a normal stock market sell off, the shorts will "cover" their position which means they have to buy the stocks back to lock in profits.

This will normally slow down markets as they fall providing a speed bump on the way down. If the short position is low (it is), investors are leveraged into the market (they are), mutual fund cash positions are low (they are at record lows) and stocks were to fall, it could get very ugly fast.

When talking about the markets people sometimes ask me to explain what it means to "short" a stock. It is a little easier in person because I can use props and live people to show how it works.

Imagine there are 3 people who live on a street.: Dave, Cindy, and Mike.

Dave has 1 share of Netflix stock worth $200.

Cindy wants to "short" that share of stock.

Cindy then tells Dave she wants to borrow his 1 share of Netflix. She tells him that she wants to keep it at her house for a few weeks. Dave agrees and tells her to treat it good while she borrows it. He loves that Netflix share.

Cindy then takes Dave's Netflix share and sells it to their neighbor Mike for $200. She puts the $200 in her pocket and now the share of Netflix is sitting at Mike's house. Poor Dave is at home watching old movies without his Netflix, not even realizing what is taking place across the street.

A month goes by and Dave calls Cindy to ask for the share of Netflix back. She says okay, picks up the phone, and tells Mike she wants to buy the share back.

Here's the nice part for Cindy: the stock today, a month later, is only worth $190.

Mike gives her back the share of Netflix in exchange for $190. Cindy then brings the share back across the street and gives it to Dave.

Everyone is back to where they started, but Cindy now has $10 in profit in her pocket.

"We are terribly concerned with what is ultimately the pain hast to be taken. The number could approach aggregate mortgages 5 or 6 trillion dollars. The question is how much of that is overhang and how much of it has to be written off."

"NAR says based on inventory and absorption rates we have little over 8 months supply. The reality which you add up all the houses for sale, houses vacant not yet on the market, houses underwater, seriously delinquent, in foreclosure, almost in foreclosure, the number is closer to 60 months, 5 years"

"Who is going to absorb the foreclosed homes?"

I hope to be someone to absorb some of the foreclosed homes. After supply meets demand, and prices collapse down to fair market value.

Wednesday, March 9, 2011

Pretty cool image below for those that work better visually with colors. It shows the Case Shiller Index per city of prices falling (orange), the artificial home buyer tax credit recovery (blue), then the continued recent downfall (orange again).

Interesting graph below which shows the percentage of gold holdings in global pension funds. Pension funds are monsters in the financial community with a total value of about $31.1 trillion.

This is money that comes in and is invested to pay future retirement payments for current employees. The percentage of this $31.1 trillion invested in gold related assets is .30%. The rest is in traditional assets such as stocks, bonds, and real estate.

The question of course is what happens if just a tiny fraction of these funds decides to move into precious metals?

The question applies forinsurance companies who are $18.7 trillion in size. They also focus their investments in stocks, bonds, and real estate.

It is not even worth thinking about what would happen if some of these funds moved into silver, which is only a fraction of the size of the gold market. The entire available above ground silver, about 1 billion ounces, is only worth $35 billion total.

For more silver thoughts, I would listen to recent interviews and presentations from billionaire and money money Eric Sprott:

Tuesday, March 8, 2011

As news continues to stream from the Middle East on the spreading revolutions, it is important not to forget that across the pond in Europe things continues to grow darker by the day.

The following are the 10 year yields for individual country debt. As yields go higher it means bond values are falling and investors are demanding a premium to loan the country their money.

As yields rise higher it also makes it tougher for the country to pay the debt it already has in place, which then leads to a bail out. If a bail out cannot be put together in time, then we have Lehman Brothers part II. Stay tuned.

He discusses the Federal Reserve's invisible hand in the markets that pushes asset prices higher with $4.1 billion printed and pumped into the markets each and every day.

Trimtabs believes QE 3 and 4 will follow soon after 2, and where the world goes once the music stops and the markets "no longer believe the game the Fed is playing?" They, along with all market participants, have no idea.

Sunday, March 6, 2011

In 2008, when oil reached $147 per barrel, Americans were spending $467 billion per year on energy. (fuel, gas, etc)

In 2009 the price of oil collapsed following the financial crisis. The cost of energy for Americans fell to $265 billion per year, which freed up an additional $200 billion in money to spend, save, or invest. This was a tremendous boost to the economy.

This year, before the recent run up in oil prices, Americans were already back on track to spend $400 billion on energy needs.

The following chart shows the rise, fall, and rise again of oil prices:

Our economy is far different than it was back in 2008 during the first run up. Here are the 3 main reasons why we are far less prepared for an oil price shock:

1.The number of unemployed Americans is now 100% higher than 2008. This does not factor in true unemployment, which I discussed on Friday. A big portion of the job losses have come from the bursting of the real estate bubble in the form of construction workers, real estate agents, mortgage loan officers; all disappearing.

2.Real estate prices, the engine behind the artificial prosperity of the 2000's, have fallen 30% and appear to be making their next move down. This eliminates the "ATM" effect for the American consumer who borrowed from their home and spent the money into the economy.

3.The stock market is down considerably from the early 2008 prices taking away another form of artificial wealth.

The following shows who owns the largest percentage of oil reserves around the world:

You can see the Middle East is the dominant force. If you haven't turned on the news over the past month, the Middle East is currently on the verge of complete chaos.

This chaos has increased the cost of gasoline by 21.85% over the past month.

The cost of energy, should it continue to rise, has the ability to tip the economy back into recession as it did during 2008.

The key question is, what happens at that point? Most market observers feel that money will move out of stocks and commodities and back into the traditional safe assets such as cash and treasury bonds.

But what if this time is different?

What if this time the world viewed treasury bonds as "less safe" than previously thought?

I do not think this coming fall will be differnent. I believe money will move back into cash and treasuries during the next "risk off" episode. I discussed what could cause this next leg down in Big Picture Outlook: Waves.

I believe we are likely to see one more deflationary fall, then reflation by central banks around the world. However, the next boom/bust cycle, which could be a few years away, will be different.

During that period investors will run from treasury bonds and flee to hard assets. Commodities. We will be faced with a currency crisis.

This will most likely take 2-5 years to play out, and investors need to be vigilant and focused along the way during each deflation/reflation cycle.

In the mean time, I will continue to focus on why the final cycle will be different. We'll discuss why investors will ultimately run from both treasuries and the dollar. Investors need to prepare their portfolio for this event today, as it will change the landscape of the global financial world over the next century.

"We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and but she will never sit down on a cold one either."

- Mark Twain

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait."

- Charlie Munger

"Live as if you were to die tomorrow. Learn as if you were to live forever."

- Gandhi

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I wait for a situation that is like the proverbial shooting fish in a barrel."

- Jim Rogers

"Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

- James Grant

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

- Ben Bernanke, March 2007

"Everything that needs to be said has already been said. But since no one was listening, everything must be said again."

- Andre Gide

"When people are getting richer and richer but they're not actually producing anything, it can't end well."

- Louis CK

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could."

- Rudiger Dornbusch

"I don't write about what I know. I write to find out what I know."

- Patricia Hampl

"Chains of habit are too light to be felt until they are too heavy to be broken."

- Warren Buffett

"Everyone has a plan until they get punched in the mouth."

- Mike Tyson

"Interest on the debt grows without rain."

- Yiddish Proverb

"You can have comfort, or you can have value. You cannot have both."

- Jim Grant

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

- Warren Buffett

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"Men who can both be right and sit tight are uncommon."

- Jesse Livermore

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

-Ludwig von Mises

"Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them."

- Howard Marks

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

-Mark Twain

"None are more hopelessly enslaved than those that falsely believe they are free."

-Goethe

"The longer the markets disobey basic rules of valuation, the bigger the opportunity for good investors to reap the benefits. Value investing works precisely because markets become dysfunctional at times."

-John Coumarianos

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

-Sir John Templeton

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"People only accept change in necessity and see necessity only in crisis."

-Jean Monnet

Requiring a central bank to print money to increase government's purchasing power invariably ignites a hyperinflationary firestorm. The result through history has been toppled governments and severe threats to societal stability.

- Alan Greenspan

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

- Henry Ford

"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

-Steve Jobs

"I'd be a bum on the street with a tin cup if the markets were always efficient."

-Warren Buffett

"The market can stay irrational longer than the investor can stay solvent."

- Keynes

"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

-Ayn Rand, 1974

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

- F. Scott Fitzgerald

"All our life, so far as it has definite form, is but a mass of habits - practical, emotional, and intellectual - systemically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter may be."

-William James

"Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

- Stephen Hawkings

"Give me control of a nations money supply, and I care not who makes it's laws."

- Amschel Rothchild

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

- Sigmund Freud

Many of life's failures are people who did not realize how close they were to success when they gave up.